Do Product Returns Distort Retail Profitability? Evidence from Transaction Data

Abstract

This study examines how product returns affect retail profitability using transaction-level data. While returns are often treated as a routine operational issue, their financial implications are not always fully captured in standard performance metrics. The analysis introduces a return-adjusted profitability framework and applies it to a multi-year retail dataset, allowing for a detailed examination of how returns influence margins across transactions and product categories. The results show that returns are generally associated with lower profitability, although the magnitude of the effect varies depending on product characteristics and over time. The study contributes to the literature by providing a practical and replicable approach to incorporating returns into profitability measurement at a granular level. It also highlights how conventional performance indicators may overestimate economic performance when transaction reversals are not explicitly considered. These findings are particularly relevant for retail environments where analytical systems are still developing and where reliance on aggregated indicators may limit the accuracy of decision-making.